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Market Structure

Intrinsic Value (Options)

The portion of an option's price that comes from the stock already being past the strike. Zero for out-of-the-money options.

What is intrinsic value?

Intrinsic value is the portion of an option's premium that comes from the stock already being past the strike. It is what the option would be worth if exercised right now.

  • Call intrinsic value = stock price - strike price (or zero if negative).
  • Put intrinsic value = strike price - stock price (or zero if negative).

Examples

  • Stock at $100, $90 call: intrinsic value is $10. If the call is trading for $11, that last $1 is extrinsic value.
  • Stock at $100, $110 call: intrinsic value is $0. The call is OTM. Its entire price is extrinsic.
  • Stock at $100, $110 put: intrinsic value is $10. Exercising lets you sell at $110 what is worth $100.

Why it matters

Intrinsic value does not decay with time. A deep-ITM option is mostly intrinsic value, so it loses less to time decay than an ATM or OTM option does. That is why long-term bullish traders often buy deep-ITM calls (LEAPS) as a lower-capital proxy for owning the stock.

Related Terms

Extrinsic Value (Time Value)

The portion of an option's price that is not intrinsic value. Decays to zero at expiration and is driven by time and implied volatility.

In the Money (ITM)

An option with real value right now. A call is ITM when the stock is above the strike; a put is ITM when the stock is below.

Option Premium

The price paid for an option contract, quoted per share. Multiply by 100 for the total cost per contract. For buyers, it is the maximum possible loss.

Options

Contracts that give the buyer the right, but not the obligation, to buy or sell a stock at a specific price before a specific date.

Out of the Money (OTM)

An option with no intrinsic value. Its price comes entirely from time value and the chance the stock moves before expiration.